For several years Municipal Mortgage and Equity LLC has been trying to transform itself from an oddball tax-advantaged investment vehicle to a full-fledged financial services company focused on apartment developers.
The Baltimore company, known as MuniMae, took a big step toward that goal last week, when it announced it had agreed to buy the U.S. low-income housing tax credit syndication business of the Australian property conglomerate Lend Lease Corp. for $102 million.
The deal, expected to close in the third quarter, would make MuniMae "the dominant player" in the tax credit syndication business, boosting its market share, now between 2% and 3%, to 15%, according to Brian Legg, an analyst at Merrill Lynch & Co. in New York. The Boston-based Lend Lease unit manages $3.8 billion of tax credit investments.
In an interview Friday, Mark Joseph, MuniMae's president and chief executive, said there is little overlap between its current pool of developer clients and that of the outfit it would acquire, so there would be opportunities to cross-sell debt products. (MuniMae is one of the 26 firms licensed to originate multifamily loans under Fannie Mae's Delegated Underwriter and Servicer program.)
It remains to be seen whether the notion of one-stop shopping appeals to property developers. "Any developer wants the cheapest financing possible, and they don't really care who they get it through," said Mr. Legg of Merrill.
However, he also said that sometimes developers are under pressure to close on financing quickly and do not have as much time to shop around. "If someone can bring you all the products and services you need, it certainly doesn't hurt."
Mr. Joseph argued that it would make life easier for the developer to get a project's equity and debt financing from one source. For example, both a construction lender and an equity partner would want to review the construction drawings, building permits, and appraisals, he said. "With all these elements, you're saving duplications of, and sometimes triple the amount of, paperwork."
It is "much simpler" to negotiate with one financing source, and hence deal with one set of lawyers, according to Mr. Joseph. He predicted that, of the $1.5 billion of deals he expects MuniMae to originate this year, at least half will involve projects for which it provides the debt and the equity.
Founded in 1986 as a limited partnership with shares registered with the Securities and Exchange Commission and available to the public, MuniMae spent its first 13 years doing one thing: buying tax-free bonds issued by municipalities to finance the construction of affordable housing.
Dividends passed on to shareholders from the bonds are tax-exempt, a quirk that endeared MuniMae to wealthy individuals. In 1996 it converted to a limited liability company and listed its shares on the New York Stock Exchange.
Three years later it acquired Midland Financial Holdings Inc., a Clearwater, Fla., firm with a hand in many different housing-related businesses, including construction lending, permanent mortgages, tax credit syndication, and advising pension funds on investments. The Fannie Delegated Underwriter license came with Midland, as did approval to originate multifamily mortgages for the Federal Housing Administration.
"We're trying to put all the pieces together for any specific developer," Mr. Joseph said.
To finance the purchase of the Lend Lease unit, MuniMae received a commitment from Royal Bank of Canada's RBC Capital Markets for a $120 million, one-year credit line, which it intends to pay off with the proceeds from a planned secondary share offering that will take place this summer.
As a syndicator, MuniMae raises money for affordable housing projects from corporations looking for tax credits. It ensures that the projects are run properly and rented to people who fit the income profile. In return for doing so, it is paid asset management fees, which it holds in escrow for several years, in case it needs the money to shore up the properties.
Under generally accepted accounting principles, MuniMae must amortize these fees over several years rather than book them as income when they are collected. Since the number of shares would increase and the Boston operation's earnings would be amortized, the acquisition would dilute earnings per share as calculated under GAAP, Mr. Joseph said.
However, the several million dollars of fees that the Boston shop collects annually would boost cash available for distribution, he said. "If you're a shareholder, you're more secure about the dividend."
Still, he expects that over 85% of MuniMae's dividends this year will be paid out of the bond portfolio - and hence tax-exempt - because a subsidiary retains most of the earnings from its taxable business lines.
It would lose that relative advantage if the Bush administration's proposal to end the taxation of dividends were passed. If that happened, Mr. Joseph said, MuniMae might consider reducing the portion of dividends that come from the bond pool. Another alternative would be to convert to a C-corporation, in which case it would no longer have to prepare customized forms for shareholders telling them how much they owe in taxes on their shares, a procedure he said is costly.
"At a 7%-plus dividend yield, we're pretty competitive even without the benefit," he said.
Mr. Joseph also said he was relieved that a provision in the original Bush proposal that he feared would have discouraged investment in affordable housing tax credits did not make it into the latest version.
He called the $102 million that MuniMae would pay Lend Lease "fair," but others suggested it was a bargain.
In a May 15 report, Paul Snushall, a Merrill analyst in Sydney, estimated the deal's price/earnings multiple at 15 and said that he had calculated the value of the business at around $260 million.
A spokesman for Lend Lease said the price was higher than the unit's book value, which was "never written down." (In January the parent company wrote down its other U.S. businesses by $300 million. This month it agreed to sell three of them to GMAC Commercial Mortgage Corp.)
Lend Lease does not break out the profits of the tax credit unit. In the second half of last year, the most recent period for which data is available, the unit took in $6.4 million of revenue, 30% more than it did in the same period a year earlier.
